diff --git a/monkey/monkey_island/cc/setup/data_dir.py b/monkey/monkey_island/cc/setup/data_dir.py
index c95bc897d..d4d176ba7 100644
--- a/monkey/monkey_island/cc/setup/data_dir.py
+++ b/monkey/monkey_island/cc/setup/data_dir.py
@@ -1,5 +1,44 @@
+import logging
+import shutil
+
+from common.version import get_version
 from monkey_island.cc.server_utils.file_utils import create_secure_directory
+from monkey_island.cc.setup.version_file_setup import (
+    get_version_from_dir,
+    is_version_greater,
+    write_version,
+)
+
+logger = logging.getLogger(__name__)
 
 
-def setup_data_dir(path: str):
-    create_secure_directory(path)
+def setup_data_dir(data_dir_path: str):
+    logger.info("Setting up data directory.")
+    _reset_data_dir(data_dir_path)
+    create_secure_directory(data_dir_path)
+    write_version(data_dir_path)
+    logger.info("Data directory set up.")
+
+
+def _reset_data_dir(data_dir_path: str):
+    try:
+        data_dir_version = get_version_from_dir(data_dir_path)
+    except FileNotFoundError:
+        logger.info("Version file not found on the data directory.")
+        _remove_data_dir(data_dir_path)
+        return
+
+    island_version = get_version()
+    logger.info(f"Version found in the data directory: {data_dir_version}")
+    logger.info(f"Currently running version: {island_version}")
+    if is_version_greater(island_version, data_dir_version):
+        _remove_data_dir(data_dir_path)
+
+
+def _remove_data_dir(data_dir_path: str):
+    logger.info("Attempting to remove data directory.")
+    try:
+        shutil.rmtree(data_dir_path)
+        logger.info("Data directory removed.")
+    except FileNotFoundError:
+        logger.info("Data directory not found, nothing to remove.")
diff --git a/monkey/monkey_island/cc/setup/version_file_setup.py b/monkey/monkey_island/cc/setup/version_file_setup.py
new file mode 100644
index 000000000..ac45c201b
--- /dev/null
+++ b/monkey/monkey_island/cc/setup/version_file_setup.py
@@ -0,0 +1,21 @@
+from pathlib import Path
+
+from packaging import version
+
+from common.version import get_version
+
+_version_filename = "VERSION"
+
+
+def get_version_from_dir(dir_path: str) -> str:
+    version_file_path = Path(dir_path, _version_filename)
+    return version_file_path.read_text()
+
+
+def write_version(dir_path: str):
+    version_file_path = Path(dir_path, _version_filename)
+    version_file_path.write_text(get_version())
+
+
+def is_version_greater(version1: str, version2: str) -> bool:
+    return version.parse(version1) > version.parse(version2)
diff --git a/monkey/tests/unit_tests/monkey_island/cc/setup/test_data_dir.py b/monkey/tests/unit_tests/monkey_island/cc/setup/test_data_dir.py
new file mode 100644
index 000000000..81ed1f51d
--- /dev/null
+++ b/monkey/tests/unit_tests/monkey_island/cc/setup/test_data_dir.py
@@ -0,0 +1,60 @@
+from pathlib import Path
+
+import pytest
+
+from monkey_island.cc.setup.data_dir import setup_data_dir
+from monkey_island.cc.setup.version_file_setup import _version_filename
+
+current_version = "1.1.1"
+old_version = "1.1.0"
+
+
+@pytest.fixture(autouse=True)
+def mock_version(monkeypatch):
+    monkeypatch.setattr("monkey_island.cc.setup.data_dir.get_version", lambda: current_version)
+    monkeypatch.setattr(
+        "monkey_island.cc.setup.version_file_setup.get_version", lambda: current_version
+    )
+
+
+@pytest.fixture
+def mocked_data_dir_path(tmpdir) -> Path:
+    return Path(tmpdir, "data_dir")
+
+
+@pytest.fixture
+def mocked_version_file_path(mocked_data_dir_path: Path) -> Path:
+    return mocked_data_dir_path.joinpath(_version_filename)
+
+
+def test_setup_data_dir(mocked_data_dir_path, mocked_version_file_path):
+    data_dir_path = mocked_data_dir_path
+    setup_data_dir(str(data_dir_path))
+    assert data_dir_path.is_dir()
+
+    version_file_path = mocked_version_file_path
+    assert version_file_path.read_text() == current_version
+
+
+def test_old_version_present(mocked_data_dir_path, mocked_version_file_path):
+    mocked_data_dir_path.mkdir()
+    mocked_version_file_path.write_text(old_version)
+    bogus_file_path = mocked_data_dir_path.joinpath("test.txt")
+    bogus_file_path.touch()
+
+    # mock version
+    setup_data_dir(str(mocked_data_dir_path))
+
+    assert mocked_version_file_path.read_text() == current_version
+    assert not bogus_file_path.is_file()
+
+
+def test_data_dir_setup_not_needed(mocked_data_dir_path, mocked_version_file_path):
+    mocked_data_dir_path.mkdir()
+    mocked_version_file_path.write_text(current_version)
+    bogus_file_path = mocked_data_dir_path.joinpath("test.txt")
+    bogus_file_path.touch()
+
+    setup_data_dir(str(mocked_data_dir_path))
+    assert mocked_version_file_path.read_text() == current_version
+    assert bogus_file_path.is_file()